The following information is taken from the financial statements of Knights, Inc. From the balance sheet: Cash
Question:
The following information is taken from the financial statements of Knights, Inc.
From the balance sheet: | ||
Cash | 30.000 $ | |
Accounts receivable | 150.000 | |
Inventory | 200.000 | |
Factory assets (after deducting accumulated depreciation) | 500.000 | |
current liabilities | 150.000 | |
Total equity | 300.000 | |
Total assets | 1.000.000 | |
From the income statement: | ||
net sales | 1.500.000 $ | |
cost of goods sold | 1.080.000 | |
operating expenses | 315.000 | |
interest expense | 84.000 | |
income tax expense | 6.000 | |
Net income | 15.000 | |
From the cash flow statement: | ||
Net cash from operating activities (including $79,000 of interest paid) | 40.000 $ | |
Net cash used in investing activities | (46.000) | |
Financial movements: | ||
Borrowed amounts | 50.000 $ | |
Repayment of borrowed amounts | (14.000) | |
dividend payment | (20.000) | |
Net cash from financing activities | 16.000 | |
Net increase in cash during the year | 10.000 $ |
Instructions
1. Explain how the interest expense shown on the income statement could be $84,000 when the interest payment shown on the cash flow statement is only $79,000.
2. Compute the following:
- Current ratio
- Quick ratio
- Working capital
- Debt ratio
3. Compute the following ratios (assume that the year-end amounts of total assets and total stockholders' equity also represent the average amounts throughout the year).
- Return on assets
- Return on equity
Interpret the company's performance under these metrics. Explain why return on assets and return on equity are so different.
Discuss
( 1 ) the apparent security of long-term creditors' receivables and ( 2 ) the prospects for Knights, Inc., maintaining its dividend payments at the current level.
Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon